Nike Tumbles Most Since 2008 As Profit Drops

Nike Inc. (NKE) tumbled the most in more than three years after fourth-quarter profit unexpectedly declined for the first time since 2009 as marketing costs increased and sales growth slowed.
Nike, the world’s largest sporting-goods company, fell 9.4 percent to $87.78 at the close in New York for the largest decline since Dec. 1, 2008. The stock had gained 0.5 percent this year through yesterday.
Net income in the quarter ended May 31 declined 7.6 percent to $549 million, or $1.17 a share, Beaverton, Oregon-based Nike said yesterday in a statement. That’s the first drop since the November 2009 quarter. Analysts projected $1.37 a share, the average of 20 estimates. Profit had topped analysts’ expectations in 22 of the past 23 quarters.

Chief Executive Officer Mark Parker responded to higher costs by introducing widespread price increases in January to improve Nike’s gross profit margin, which narrowed for the sixth straight quarter. The company’s sales also slowed in Europe, where it generates about a quarter of its revenue, as recession and government cuts curbed consumer spending.

“We would not be buyers of the stock” because of concerns sales growth will slow and the risk that Nike will be left with a glut of inventory after the Olympics, Camilo Lyon, an analyst for Canaccord Genuity Corp. in New York, wrote in a note to clients today. He lowered his 12-month price estimate on the shares to $92 from $104.
Marketing Spending

Nike’s profit fell as sales gained 12 percent to $6.47 billion, short of analysts’ projections of $6.51 billion. While revenue from China rose 18 percent to $667 million, Nike expects growth to moderate and said it has too much inventory in the region. Sales from that area increased 25 percent in the previous quarter.

Orders for the Nike brand from June to November, excluding currency exchange-rate changes, advanced 12 percent. Analysts projected a gain of 16 percent, the average of eight estimates. Orders for March to July rose 18 percent. Orders from China increased 2 percent, following a 20 percent gain in the previous period.

A $24 million charge related to restructuring its business in western Europe, higher tax rate, discounting and increased marketing during the quarter reduced earnings, the company said.
Nike increased spending on marketing by 23 percent to $760 million to support product releases tied to the European football championships and the Olympics.

Gross margin, or the percentage of sales left after the cost of goods sold, narrowed 1.5 percentage points from a year earlier to 42.8 percent.
Cole Haan Losses

The Umbro and Cole Haan units, which Nike plans to sell, had a combined loss of $43 million before interest and taxes in fiscal 2012 and would lose as much as $75 million if owned for all of fiscal 2013, the company said.

“With Nike, we are often used to things coming in better than expected,” Paul Swinand, an analyst for Morningstar Inc. (MORN) in Chicago, said in a telephone interview. “In this case, almost every line item came in a little worse than expected.”

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